In a trading session marked by signs of year-end investor fatigue, U.S. stocks managed to secure slight gains on Wednesday despite subdued trading and a lack of significant market-moving news. The S&P 500 concluded the session 0.3% below its record closing high of 4,796.56 on January 3, 2022, while the Dow achieved a new record closing high.
Throughout the day, the three primary U.S. stock indexes experienced fluctuations, alternating between modest gains and losses before ultimately closing in positive territory. Despite the mixed performance, all three U.S. indices are poised for monthly, quarterly, and annual gains.
The primary driver influencing the market was a notable decline in the crucial benchmark 10-year U.S. yield. Following a positive reception for Tuesday’s two-year sale, the auction of $58 billion in five-year notes on Wednesday garnered favorable attention. This development, coupled with the prevailing market holiday condition, sets the stage for a potential clean sweep if Thursday’s 7-year note auction unfolds successfully.
Although the period between Christmas and New Year’s is typically characterized by a lack of significant market-moving news, Wednesday’s Treasury rally, propelled by the success of the five-year note auction, carried considerable weight. As a result, 10-year yields saw an increase of almost 10 basis points, slipping below 3.80%, marking the lowest since July.
The recent surge in buying activity in both stocks and bonds is closely tied to widespread anticipation of lower yields in 2024, driven by expected rate cuts from the Federal Reserve. However, a significant unresolved aspect pertains to the market’s pricing of these rate cuts, which appears notably more aggressive than indicated in the December dot plot.
While flashes of uncertainty and indecision marked the New York session, the fall in U.S. yields may instill confidence in investors to maintain a bullish course through year-end. Nevertheless, it is expected to keep short sellers at bay, despite their lingering frustration.
Reflecting on the tumultuous year, especially in the rates markets, it is astonishing that 10-year yields are trading nearly on top of the 2022 closing levels.
Forex Market: U.S. Dollar Experiences Overnight Sell-Off Amid Holiday-Thin Liquidity
The overnight sell-off of the U.S. dollar, driven by auction pass-throughs, was likely exacerbated by holiday-thin liquidity, leading to breaches of significant and noteworthy levels.
USDJPY is once again trading south of 142, while the EURUSD broke fresh higher ground above 1.1100, indicating that the market perception of a March Fed rate cut is solidifying.
The JPY, with its real yield appeal, is gaining traction. With over 150 basis points of Fed cuts being priced in and the end of negative rates in Japan prominently on the radar, the possibility of testing 140 in early 2024 is not out of the question.
Oil Market: Prices Decline as Shipping Resumes Despite Ongoing Tensions
Oil prices experienced a decline as global shipping giants prepared to resume navigation through the Red Sea, despite ongoing missile attacks from Houthi rebels. This decision reflects a calculated risk, banking on the success of a new multinational maritime task force, Prosperity Guardian, commissioned to safeguard the region.
On Wednesday, Danish shipping company Maersk announced its intention to resume scheduling vessels for the Suez Canal via the Red Sea in the coming weeks, following a temporary pause.
